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Amateur Investors Weekend Stock Market Analysis (2/28/09)

http://www.amateur-investor.net/Weekend_Market_Analysis_Feb_28_09.htm

The market had another bad week as all three major averages are now exhibiting their final 5th Wave down in association with a longer term Elliott 5 wave pattern that began in October of 2007. A classic looking Elliott 5 Wave pattern is shown below. Keep in mind once the 5th Wave down ends this should be followed by a substantial "ABC" type corrective rally that may last several months.



In the chart below I have labeled all of the sub Waves and major Waves for the Dow. Also notice the Nasdaq and S&P 500 are exhibiting similar patterns as well.



Nasdaq



S&P 500



At this point I know many investors are wondering when a bottom may occur. As mentioned above it does appear we are seeing the final 5th Wave down so that is a positive sign. However it's nearly impossible to know when the exact bottom will occur. According to Elliott Wave Theory the 5th Wave should have 5 sub waves to it with "3" Waves down and "2" Waves up. If we take a closer look at the S&P 500 on a daily chart it appears we are in the 3rd sub wave down at this time which eventually should be followed by a 4th sub wave up and then the final 5th sub wave down.



Finally one thing to keep an eye on in the weeks ahead is the 5 Day Average of the Put to Call Ratio. So far since the October 2007 top it has done a good of signaling the completion of major Waves. Notice when the 5 day Average of the Put to Call Ratio has risen above the 1.15 level (purple line) that this was followed by the completion of Waves 1 and 3 Down. Meanwhile when the 5 Day Average of the Put to Call Ratio dropped below the 0.85 level (green line) this was followed by the eventual completion of Waves 2 and 4 Up shortly thereafter.

Now what is a little bit mystifying to me at this point is that the latest drop in the S&P 500 hasn't generated any fear among the Options crowd as the 5 Day Average of the Put to Call Ratio has actually been falling (points A to B) and is getting close to the 0.85 level again. Thus you really have to wonder what it's going to take to get investors fearful of this market to allow for a bottom to occur. At this time it appears the Options crowd believes the market is getting near a bottom so that is why they have been loading up on Calls of late. Thus we shall see if they are right or not over the next few weeks.